In Advertising, Do You Bet on Goliath or David?
Listen to the clink of glasses in the quiet cabin of the Cessna CitationX+ jet at 617 nautical miles an hour. Martin Sorrell, Chairman and CEO of the 194,000-employee WPP Group, is hosting a quick Davos run. Two privileged clients in Italian sport coats and jeans are toasting with him. They’re celebrating their camaraderie, not a business gain.
That’s because there wasn’t any. Gain, that is. The reason: these are clients of a giant agency. Mirbach’s Law of Agency Performance is: The smaller the agency and its ownership, all the way down to one person, the better the business results they generate. Conversely, the larger the agency, the worse business results they produce.
You rarely see neat before & after tests of this law. Big clients choose big agencies. When they switch, it’s to another of about the same size. Small clients choose the largest small agencies that’ll take them.
Freelance teams or small, owner-operated shops don't often replace huge, publicly held agencies. And of course, not all small shops are equally effective, either. Just being small isn't a performance guarantee. When it happens and works, it’s often a prelude to the small agency's acquisition by a holding company. And history is rewritten.
How Come?
This law works for three reasons. The first involves that jet. Whether they’re on the plane or not, all WPP’s clients pay for Martin, his colleagues and their perks.
Everyone who works for WPP gets less money because that private jet burns it off. You can call it “holding company overhead” or “hidden tax” or “tribute”. It means that every dollar clients spend on huge agencies gets "skinned." The "skin" is funneled to the corporate parent.
My friend Robert, who sold his agency to a holding company, explained it to me. “Out of every dollar I collect from a client now, almost five cents go to New York to pay for ‘headquarters’. And none of us – not my clients, employees or me – get back that much value.” That nickel is about half of the dime that would go to profit and bonuses at a local agency. Freelancers have even more advantage versus the holding companies.
Big shops stay in character. They turn out consistent, just-okay advertising that anybody they hire can do. They give employees simple frameworks so anyone, regardless of skill level, can meet standards.
The third problem is the “restaurant-with-a-view” syndrome. Know how the food at restaurants with great views is mediocre? In the advertising business, client service is “view” and creative is “food.”
The key big agency priority is long-term client relationships. “A sick, profitable dependency” is what a cynical agency manager I know calls it. To foster it, they invest in client service people who're skilled at building relationships. That investment comes at the cost of the creative talent budget.
Freelancers and small agencies don’t or can’t invest in relationship building to the same degree. Users of freelancers and small shops often say, “We work with them despite their eccentricities.”
So What Should You Do?
Suppose you recognize that creatives' pay and how they're managed impact your ad performance. What’s a client to do? Hire freelancers? Tiny agencies? Or what?
Just before you take my advice, there’s a Corollary to the Law that affects your decision. The larger the agency, the more consistent ads are both over time and across geography.
Suppose you must have the same message year in and year out, and across countries and continents. One of the five giant agency networks is more likely to give it to you. Coordination is easier inside a network of captive agencies (“docile”?) compared to independent shops that you have to manage worldwide.
If you’re leaning to huge, ask yourself why. Aside from neatness and ease-of-use, what is it going to do for you? Why put consistency above higher market shares, bigger revenue gains and more profit growth? All the things you'd likely get from working with freelancers and small agencies.
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So you’re in, right? We’re aiming for in-market performance. Period.
Let's examine the typical career pattern of a copywriter or art director. Our hero starts as a puppy in a client-side internal agency, doing tonnage. Writing emails to client and prospect lists is an example. With a track record and a book of samples, they go to an agency. Maybe they jump from one agency to the next for a few years, doubling their salary each time. Finally, a client offers to follow them anywhere, and they go freelance.
That’s whom you should be hunting for. Either catch one in a small shop on the way up or once they've gone freelance. It's how you find a breath of fresh air—and creative thinking— to build your business.
Once you get the right freelancers and small shops, you may have more obstacles to overcome. You have to deal with institutional issues.
Finance controls most clients, not Marketing. Finance people go nuts over little vendors. These gnats clog databases and insist on high service levels. They demand advance partial payments, 30-day terms versus 60-day terms of giant agencies, etc.
Finance retaliates. “Decrease the number of vendors. Anyone in Marketing who wants to do anything has to go through one of our two agencies. Or else. Two is enough.
“Drop those pesky little, overpriced work-at-home shops right now. The company will save millions on agency fees and invoicing. We can get price concessions from our largest agencies and we get only a couple invoices a month. Much better.”
With reluctance and pragmatism, the CMO complies. To get anything done at all, she needs Finance—and her CEO— to be happy.
What’s wrong with that? You won’t know for a couple of years. By then, the ads done by freelancers will have worn out. You'll be running ads done by the underpaid, group think collective at a holding company agency.
Procter & Gamble, world's largest ad spender, has purged lots of agencies. They dump the little agencies who’ve crept onto the vendor list since the last purge. And they trumpet how hard they work to reduce agency fees. So the big agencies they do use face intense cost pressure.
Where do you think cost cutting hits hardest – in corporate jets or in creatives’ W-2’s? Do you wonder whether these "efficiencies" have played a role in P&G’s volume declines?
My advice for you: do the work to get top-level market performance. Use judo; exploit your finance partner's rationality. Conduct head-to-head tests of creative resources. Put in big shops if they’re willing, but have a majority of small agencies and freelancers. Show Finance your open-mindedness. Test an array, not just the lowest bidder or the one with more offices.
Tests will probably show you that freelancer and small shop work work wins. You may have to put together your own production team to get freelancers' work in the market. Do what’s best for your business.
Seek out the biggest talents, not the biggest agencies. Then reward creative talent and performance in outsized ways for huge market wins. It's more fun and more fulfilling than a ride on a corporate jet.
Tell me how that works.
Disclaimer. No agency CEO’s were harmed in writing this post. Martin Sorrell and the other agency holding company CEO's are all motivated, hard-working, talented people. It’s a tough assignment.
